Parliamentary Inquiry told ALP proposed franking tax credit rebate policy has many unintended consequences

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While the intent of the Labor Party’s (ALP) proposed franking tax credit rebate policy is admirable, the execution is far from it, according to a presenter at this afternoon’s Parliamentary Inquiry by the Senate Standing Committee in Sydney.

They were told it is regressive and its discriminatory, “like cracking a nut with a sledgehammer with many unintended consequences”, by Dr Don Hamson, Managing Director of Plato Investment Management.

Dr Hamson told the inquiry: “Let me state up front that we think the intent of this proposal is admirable. In announcing the proposal an example was provided of an SMSF that pays no tax and receives a $2.5m refund of franking credits.  I don’t think that passes the pub test.

“While the ALP intent is admirable, the execution is not.  It’s regressive and its discriminatory.  It’s like cracking a nut with a sledgehammer.

“There are many unintended consequences,” he said.

“Our modelling shows the least wealthy self-funded retirees will bear the most pain – many of them, in fact the majority women.

“And, like many others we don’t believe this proposal will raise anywhere near what has been announced,” he said this afternoon.

“The shame is the wealthiest who can afford to pay for the best advice will find ways around this proposal.”

He provided an example.  “In our submission we use an example of Mrs H.  Mrs H was my mother, who passed away just before the proposal was announced. Had she still been alive, my mother would have lost over $8,000 in franking credits.  Her after tax income, her take home pay if you like, would have fallen from over $30,000 to $22,000.  That’s 28% of her income lost!  28%!  Imagine if you lost 28% of your take home pay.  You’d be looking for another job or a second job.  Well that is what many of the people behind me are facing if this proposal – a massive loss of income.  Perhaps not 28% but substantial amounts.  But they can’t change jobs. They are retired.   No wonder they are so distraught, they feel helpless.

“To further put this into perspective, for widows or widowers in my mother’s situation, $22000 is less  than the full age pension – and its less than the 50% poverty line. People like my mother aren’t wealthy retirees, they’re battlers.  They are battlers now and even more so if this proposal is legislated.”

Retirees spending savings

“There will be significantly increased incentive for these battlers to spend their money,” said Dr Hamson, “to get below the assets test and get back their franking.

“Our Plato survey of clients which found 44% expected to be more reliant on the pension should this proposal happen, which is a big number given only 8% of those surveyed currently receive any pension.

“When I go around the country, financial planners are telling me they are very concerned that their clients are already upgrading their houses or going on holidays, so that they qualify for the pension.

“Some retirees are already reacting to this proposal,” he noted.

Super funds also impacted

“Our modelling also shows this proposal discriminates against superannuation funds based on age.  Old funds lose out to young funds.

“But it’s not just pension SMSF’s that lose, “old” APRA funds can lose too.  Some 50 out of 240 already receive net refunds and this proposal would stop those refunds, reducing fund member returns.

“The proposal announcement never mentioned these funds and so doesn’t appear to include their members in the numbers affected.

The sad reality is those members probably have no idea they will lose if this proposal is legislated.”

A solution

“Finally, on alternative solutions, the Plato survey found :

  1. 9% preferred a $10,000 maximum franking credit refund per person,
  2. 25% preferred a $15,000 maximum ,
  3. an overwhelming 70% preferred franking credit refunds be allowed but total super balances (in addition to the current $1.6m pension cap) be set at a reasonable level to support retirement,

In summary, we believe this proposal is regressive, discriminates between superannuation funds based on member age and is unlikely to generate the forecast level of net savings.

“The wealthy to super-wealthy will seek advice to preserve franking value, many battlers will likely spend to keep most of theirs, but the ones in the middle will in many cases have to grin and bear it.

“But the thing about this debate that puzzles me is, this is not just about today’s retirees versus today’s workers, this proposal changes the goalposts for everyone.  It is worst for todays retired grandmothers and grandfathers because they haven’t planned for it,  but it will affect the working mothers and fathers of today when they retire, like you and me, and it will affect our children when they retire.”

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